Friday, January 7, 2011
Say hello to the Bubblemen - first up, Brian Cowen
When Brian Cowen became Irish Prime Minister in 2008, Ireland was regarded as one of the great economic success stories of the last 30 years. It had recorded stellar growth rates, sometimes reaching double digits. Her citizens grew wealthy as Ireland’s per capita GDP became among the highest in the world. Every small emerging market country wanted to be like Ireland.
From the moment that Brian stepped up to the top job, things started to fall apart. The financial crisis kicked off in September 2008, and threatened to take down the Irish banking system. As Lehman's bankruptcy papers were heading to a New York Court, Irish bank depositors became nervous. Brian prevented a run on the banks by offering a blanket state guarantee on all bank deposits. The generosity of that offer forced the rest of Europe to follow.
The guarantee provided only temporary relief. The crisis exposed Ireland’s over dependence on the property market. Despite the bank guarantee, a string of Irish banks failed, leading to one of the most catastrophic declines in output ever experienced by an industrialized economy. Government debt exploded, while the financial system imploded. Unemployment is rising, the housing market is crashing, and the government deficit is as wide as the Irish Sea.
His party will almost certainly be destroyed as soon as he calls an election. Rather than face the ignominy of a wipeout at the ballot box, many of his cabinet colleagues are throwing in the towel, and quietly going into retirement. Few politicians have ever experienced the reversal that poor Brian has faced. But how much of this calamity is the responsibility of poor Brian?
Unfortunately, he doesn't have a strong defence. He was a permanent feature of the Irish cabinet since the early 1990s. He was finance minister from 2004-2008.
He could argue that since 1999 the Irish state was no longer responsible for monetary policy and the years of excessively low interest rates that that fuelled the Irish bubble. That task had been delegated the ECB. But it was the Euro that did in Ireland. It was the single currency that created the conditions for the huge rise in property values, and a decade of grossly irresponsible banking. It was Brian and his Cabinet colleagues who are responsible for lumbering Ireland with the Euro.
Brian is the first of our bubble men - the villains that fashioned the great financial catastrophe of our age.